Busting 4 myths about income taxes
Who pays taxes, and who doesn't? Who's more likely to get audited? And what about that big refund check? Here's the scoop on 4 'facts' that really aren't facts.
This post comes from Casey Bond at partner site MainStreet.
If there's one subject people love to complain about, it's taxes. No one enjoys looking down at a pay stub to see that huge chunk of income deducted. Yet in a recent survey by GOBankingRates, a whopping 79.1 percent of respondents admitted they aren't sure how their income tax dollars are used.
And who can blame them? At an ungodly 3.7 million words, it's no wonder few Americans have familiarized themselves with the contents of the U.S. Internal Revenue Code. It's boring, it's complicated, and most troubling, it's always changing.
One thing that probably won't change anytime soon, however, is the confusion Americans feel over taxes, especially with myths and misinformation that continue to circulate. So before you believe the next "fact" about filing, take a look at four common myths about taxes -- busted.
Myth No. 1: 47 percent of Americans pay no taxes
It was the statistic that came back to bite 2012 Republican presidential candidate Mitt Romney hard: 47 percent of Americans don't pay federal taxes.
The truth is while the Tax Policy Center estimated 46.4 percent of households pay no federal income tax, it also noted that close to two-thirds of those households did pay federal payroll taxes for Social Security and Medicare. Further, two-thirds of the untaxed households were elderly, close to the rest earned less than $20,000 per year. Not to mention, it's nearly impossible to avoid federal taxes on common expenses like gas, alcohol and tobacco products.
Myth No. 2: Your tax bracket is the percent you pay in taxes
Your tax bracket definitely affects how much of your income is taxed, but not in the way you might think.
Marcus Dickerson, accredited asset management specialist for FMW Financial Advisors, LLC, said many people don't understand the progressive nature of the U.S. tax system, believing that once a certain tax bracket is reached, all income is taxed at that percentage.
"I've had discussions with several clients over the years who wouldn't get a summer job, because they thought it would push them into a higher tax bracket and cause all of their income to be taxed at that rate," said Dickerson. "The truth is, even the highest of earners in this country have the benefit of having a portion of their income taxed at 0 percent, a portion at 10 percent, a portion at 15 percent and so on."
Myth No. 3: You will only get audited if your tax return is wrong
Under 1 percent of individual tax returns are audited, though Janet Novak of Forbes noted that those chances increase once your income exceeds $200,000 annually. Even so, it's not always fudged numbers or "creative" accounting that lead to audits.
In many cases, the IRS simply wants to verify information and often, it turns out that information was reported accurately.
If you do get that dreaded piece of mail, don't be alarmed. Jordan Niefeld, a CPA with Gerstle Rosen & Goldenberg, P.A. in South Florida explained, "Of the approximately 1,500,000 individual income tax returns examined (audited) in fiscal 2012, only 25 percent were examined in the 'field,' as the IRS puts it. The rest were conducted through correspondence."
An audit could even turn out in your favor. According to Kiplinger, 66,381 audits performed in 2011 resulted in more than $1 billion in refunds.
Myth No. 4: The bigger your refund, the better
There is a lot of debate over whether it's better to get a big tax refund in April, or receive more income throughout the year with no refund at all. Both options have their merits, but one thing remains the true in either case: regardless of when you receive the money, in the end, it's still your money.
Getting a big check from the IRS isn't the equivalent of winning a prize from Uncle Sam. That's income you earned simply being returned to you. So while it's nice to see a big deposit in your bank account, know that it doesn't mean much -- except that you overpaid your taxes.
You will probably never be a tax expert, but you can be an informed taxpayer. Like all financial matters, income taxes can be complex and confusing. It's your job to educate yourself, learn to identify fact from fiction, and hopefully, be able to make smarter decisions with your money.
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VIDEO ON MSN MONEY
income taxes you dumba-- urinalists..... 47% of households pay NO income taxes... we are NOT talking about FICA you dopes.... this is a tax no one can get away without paying
Regarding "myth no.1", it was Romney's intent that the "47%" was about paying no income taxes, not paying no taxes at all. Virtually everyone pays sales taxes when they buy things in a store.
The key is to prepay ONLY the legally required 90% and KEEP THE REST until the following April. Even if you don't earn much interest, you'll still keep the use of YOUR OWN MONEY for as long as possible.
Don't listen to MSN re: income taxes --
either they lie or don't know what they're reporting.
Everything stated here has an exception &
one can only trust a qualified, professional accountant.
NO to H&R Block, etc., too.
Flat tax...few exemptions...tax ALL income for social security, not just first couple thousand.
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